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ANNUAL STATEMENT 1956 r E DE R A L RESERVE BANK OF M I N N E A P O L I S FOREWORD It is a pleasure to transmit herewith the 1956 Annual Report of this bank. The bank has had a successful year with a growing volume of operations. In addition, the head office building ex pansion program has gone along without delays, and at the close of the year the building was nearing the end of its remodeling and expansion program. In this report, as in those of the past several years, it is a pleas ure to review the developments in one of the district’s important industries. This year attention is focused on the forest industry. Chairman of the Board President • V : ; v ^4 As 4^*? I ^s#nfc 4k I -4 ^ ^W-f *, P* ^ i(- P*- - :« » jf^ L* brf v/ Forests of the Ninth district offer one of the most ’ potentials of the basic resources that sustain / ■;." district’s economy. This may appear somewhat of a ,n'ise to many of us who may be accustomed to thin\Tti ■ of timber as a ‘has-been industry. Realization of the *. ///n potential means added wealth to many localities "> rhr district and to the bankers who serve them. So it's wnrth a closer loof{. This special article in our 1956) Annual Report see\s to examine the forest resource in ,<>">< what the same brief and general way in which we ntt/'\ ctl about trends in our district's population last year. Assets grow in 'timber bank’ Forests of the Ninth district are an important basis for industry today. With material demands of our national economy constantly growing, the forest resource, renew able by nature, promises an even greater contribution to the future. As resources go, timber has a pleasant twist. Given enough time it will, like a savings account, re plenish itself. In the ‘timber bank,’ we can collect a return on our sav ings, the ‘timber bank’ being, of course, an analogy between our favorite form of enterprise, the bank, and timber growing. Suppose we sketch out this analogy just a bit. Let the savings account be repre sented by forest land . . . land with soils and characteristic climate best suited to forest growth. About onefifth of the land area of our district qualifies under this heading—over 50 million acres. The living trees in vested in the account are principal and the net annual growth would represent interest earnings. You might even figure out an interest rate. As a rough estimate of the rate of return, lumping all species together, there is about 33 billion cubic feet of timber in live Digitized FRASER IN WESTERN MONTANA LO G G IN for G SAWTIMBER trees of marketable size* in our dis trict. The net annual growth of wood in forests in this district is roughly 980 million cubic feet. Hence the annual rate of return is a shade under 3 percent on the prin cipal. There is one other point we want to make before we leave the savings account analogy. That concerns the way we withdraw funds. If we with draw more each year than is added in interest, we soon eat up our prin cipal. On the other hand, suppose we want a perpetual income. Then we had best withdraw only the interest earnings each year — leaving the principal intact to maintain earning power in future years. This is the real difference between using a self-replenishing resource like timber as an investment and using it simply as a wasting asset— *Greater than five inches diameter at breast height. 3 sort of a storehouse to be tapped until it’s empty. One of the prob lems in parts of our district is that in the past we used up much of our principal—and we are still using it up in the case of our most-prized types of timber; eg., the white, red and yellow pines. The real challenge is to build up the principal until the annual interest will take care of our needs. Unless demands get out of hand, this is a realistic goal on a re gional scale. The return we get from our forest capital refuses to behave in the sim ple fashion of interest on savings de posits or investment. Nature pays a variable scale of returns on trees. When trees are very young, the an nual return is small. As a matter of fact, for a long time, until a tree gets to five or six inches in diameter, it represents little more to the timber grower than a skeleton on which to hang next year’s growth of wood. Return is highest when trees begin to approach their ultimate size, be cause growth is added immediately under the bark, encircling completely all previous growth. It’s a case of geometry: the bigger the tree, the more can be added. Once trees have passed maturity, however, compounding of interest breaks down. The annual return may drop to nothing. Therefore, in order to get the maximum return from forest holdings, it is necessary not only to have an adequate num ber of trees for the site but also to have a stand properly balanced be tween different age groups so that 4 an optimum proportion of them are in their most productive years. Not only might the interest realized drop to zero if the capital is allowed to become too old, but decay resulting from age may actually erode the capital. In such a situation, the net return is negative. To get down to cases we can see the effects of overmature forest stands right within our own district. Look at the following table which gives some figures for softwood tim ber for two of our states with impor tant timber areas: Montana Minnesota ACREAGE— millions of a c r e s of commercial 15.1 6.8 f o r e s t in softwoods VOLUME — millions of b o a r d f e e t of live 55,100 5,000 softwood sawtimber GROWTH — millions of board feet net annual g r o w t h of softwood 229 328 sawtimber. Source: U. S. Forest Service A glance at the table will show you that Montana forests, with twice the acreage and n times the wood volume of Minnesota’s softwood stands, add only two-thirds as much sawtimber growth annually as do the forests of Minnesota. Surprising ? Not really. Much of Montana’s tim ber is ‘too old.’ The younger Min nesota timber, while rather spotty as a sawtimber supply, is growing much more rapidly than the Mon tana timber. Then, of course, the timber bank has its ‘bank robbers.’ These are the natural (or unnatural) factors that may make the capital disappear right before our eyes. Fire is one, PULPWOOD CUT, NORTHERN MINNESOTA of course, but a surprisingly minor one. Only a fraction of i percent of our commercial forest land is burned in a typical year. Other factors—in sects, diseases—are far more signifi cant. Insects have their greatest rela tive impact in the western part of our district, while diseases (funguscaused rots and cankers) are the major single cause of tree mortality in the eastern part of the district. These predators don’t go in for a simple case of robbery of our timber. Only rarely is the principal de stroyed. Even in the wake of forest fire, much sound and salvageable wood may remain in a dead tree. Of course, if the tree is killed, that puts a stop to collecting annual interest. Insects frequently kill a tree out right. Take the case of dendroctonus engelmanni. More people know the creature as the spruce bark beetle, an insect less than half as long as a man’s thumbnail, which since 1950 had laid to rest 2 billion board feet of live and growing spruce in the western Montana area. A goodly 5 CHART I, MAJOR COMMERCIAL FOREST AREAS share of this bug-killed timber has been salvaged, thanks to one of the most concerted large-scale programs of road building, wood salvage, and promotional selling in recent times —but that’s a story in itself. Worse yet is the typical effect of tree disease. Disease may not kill our trees, but may leave us with a stand of sickly, slow-growing trees that would be more like a bank full of assets that earn practically no re turn. Of course, such a situation could cumulatively rob us of a great deal of wood growth over a period of many years. The Forest Service has attempted to evaluate this type of loss (they call it growth impact) and finds it to be an even greater de stroyer of forest wealth than the out right killing of trees. This pilfering of capital and pinching-off of the interest goes on all the 6 time in the timber bank—though sel dom as dramatically and thoroughly as the spruce bark beetle invasion. There are a multitude of further complexities affecting timber as an earning account. We’ve scarcely scratched the surface in our consid eration of them. But in our year-end stock-taking for this annual report, we’ve got to get down to cases and look at the situation in our district. Not only has there been expansion within existing forest industries here, but a number of substantial new plants to utilize wood supply have been announced in the past year. Forestry is a particularly timely sub ject since the U. S. Forest Service has released in preliminary form its Timber Resources Review. This study gives us a wealth of informa tion on the present status and future prospects of timber growth. Some of 6 0 0 ' & £ o o o 'j this data is summarized in table i (see page 12). TWO BROAD AREAS PRESENT SHARP CONTRASTS There are two broad forest regions in our district. Each of these pro vides a most instructive contrast, since the problems and potentials of each are quite different. These are forests which are roughly defined as occupying the western and eastern extremities of our district. They are separated by the vast natural prairie of the northern Great Plains. The major commercial forest stands are shown on the map of chart 1 (pp. 6>7)Let’s look at the eastern region first—historically the first area to re ceive extensive cutting. The eastern forest area of the Ninth district, the shaded area on chart 1, runs 75 to 80 percent forested. Altitudes are less than 2,000 feet, with generally slight relief; rainfall 20 to 40 inches a year, with the average frost-free growing season on the order of 100 days . . . more in the south, less in the north. As an area it is a heavy exporter of wood to points south in central Wis consin and lower Michigan. It stocks a majority of the commercial forest land in the three-state region which the industry and the U. S. Forest Service refer to as the Lake States. Today it is a region of second growth forests, interspersed with hardwoods and softwoods. Hard woods such as birch, aspen, maple and oak predominate. A hundred years ago the forests of the Lake States covered twice the area they do now—then the land was graced with vast stands of sawtimber-size 7 softwood trees including white pine, red pine, spruce and balsam fir. There are differences from place to place within the eastern part of the district. For example, Upper Michi gan has some good stands of hard wood sawtimber. As a matter of fact, probably the best concentration of old stock hardwood sawtimber in one area in the Lake States is found in Upper Michigan. A substantial share of the region’s softwood for ests are concentrated in northern Minnesota. These intraregional dif ferences cast a slightly different light on the industries, problems and prospects from one locality to the other. The region’s forestry background is a story of extensive cutting, de structive burning, and of unwise clearing for farm land in many areas which later were demonstrated to be incapable of supporting profitable agricultural enterprise. Between the mid-i8oo’s and the first decade of the 1900’s, large parts of these for ests were liquidated for lumber, leaving a cutover area that presented many economic problems in the en suing decades. The drastic inroads made on the forest resource many decades ago has markedly changed the role and importance of forests in the regional economy today. According to Forest Service esti mates, sawtimber stands remaining in the Lake States contain only about 5 percent of the original sawtimber volume. (Sawtimber trees are those whose diameter at breast height is greater than about 10 inches.) Fur thermore, only a third of the existing sawtimber is of the quality which will make standard lumber. Total cut of sawtimber from the Lake States, which reached nearly 10 bil lion board feet annually at one time, is now down to less than 1 billion out of a total national cut of some 75 billion board feet (1952 figures from U. S. Forest Service). Pulpw ood lea d s in eastern forests Today with only 12 percent of the commercial forest land of the Lake States stocked with sawtimber and with much of this of inferior quality, the supply of wood for lumber is only a minor part of industrial forest use. The number of large sawmills today is but a fraction of what it was years ago. In Minnesota, for exam ple, the largest active sawmill cuts only about 5 million board feet an nually. That places it only midway in the conventional medium-size category which runs from 1 million to 10 million board feet annually. The most significant, in fact the dominant enterprise that forests of the eastern part of our district sup port is the pulp and paper industry. It consumes by far the greatest por tion of the softwood trees cut in the region — and from current signs it may not be long until pulp mills will be taking the greatest share of the hardwoods, too. The total net drain of all species from cutting in the Lake States in 1952 was 541 mil lion cubic feet. By major use these break down: Sawlogs and sawbolts Pulpwood Fuelwood All other uses 195 million 183 million 104 million 59 million cu. ft. cu. ft. cu. ft. cu. ft. Minnesota’s cut is even more heavily weighted for pulpwood. Half the cubic volume cut goes for pulp ing. Currently, above 880,000 cords or roughly 9 million trees are cut an nually for pulpwood in the state. Pulp and paper is the key indus try in forest utilization today and will be for many years in the future. Most significant is the fact that much more pulpwood is added by growth in the region each year than is cut for use, though not necessarily of the species most used in the past. The annual harvest could be expanded considerably. These prospects are the subject of a study, Pulp and paper in the upper lakes region, published by the bank last year. (All who are interested are invited to write us for a copy.) The point is clear, particularly taken in comparison with data from the western part of our district, that the bulk of the output of our eastern forests is still small stuff growthwise, and much of it in what have been traditionally considered i n f e r i o r species. The bread-and-butter prod uct is pulpwood. Yet sawtimber pro duction is a goal of most forest man agement programs—even here in the none-too-well stocked second growth forests of the Lake States. Sawtimber is a more valuable product than pulp wood on a dollars per unit volume basis. But don’t get the mistaken idea it’s an either-or proposition. M ECHANIZED PULPWOOD LO ADING Both pulpwood and sawtimber, and for that matter poles, firewood, posts, Christmas trees and many other products can be complementary crops from the same forest tract at various stages of its growth cycle. In spite of the prominence of pulpwood in this region today, sawtimber is the natural end-crop of any managed forest. Whether or not we can begin to realize anything near the economic return our forest land is capable of giving us, depends directly on the success of those who own and har vest these forests in upgrading the quality and quantity of sawtimber yield. The plain fact is that we can’t be any too complacent about our prog 10 ress in the direction of realizing maximum return from our forests. The volume of our most valuable softwoods actually has been reduced over the past 20 years. Yet forestry authorities are quick to point out a number of encouraging signs. First, recent surveys have shown that the total timber volume in the eastern part of our district is not only up over that of two decades back, but the stands in which it oc curs are generally thicker—there is more merchantable wood per acre. From the human side there is the fact that progress has been made in forest management. And too, owner ship is more stable. The rising im portance of pulpwood underlines the great potential for further use of hardwoods to expand output of the regionally important pulp and paper industry. There is a great surplus of hardwoods. Some localities even have local surpluses of softwoods suitable for pulpwood. For example, in a three-county area of northeast ern Minnesota an estimated 170,000 cords of surplus softwoods of pulping species (balsam fir, black and white spruce, and jack pine) are available annually. Problem : sm all holdings Well, it’s clear that things are looking up. Forest authorities assure us timber output could be greatly enlarged if some of the challenging problems that face the forest indus try could be met. Perhaps chief among these problems is the fact that the small timber owner does not have sufficient incentive to man age his holdings as they should be managed for maximum long-run gain. In fact he is typically under strong temptation to liquidate his holdings long before they have con tributed their greatest return. Most other classes of holders are doing pretty well in the task of husbanding their forest holdings. But the small forest owners, including the farmer, because of the great share of total commercial forest land which they in aggregate hold, are really the key to future improvement. In the Lake States nearly 16 mil lion acres of commercial forest land are held in ownerships of less than 100 acres. In Wisconsin 9^2 million acres—over half the total commer cial forest land—are in private own erships of less than 500 acres. (In Montana, on the other hand, with roughly the same amount of com mercial forest land, ownerships of that size aggregate only about 1 mil lion acres.) The root of the problem is the sim ple biological fact that it takes per haps twice as long to carry out a complete cycle of timber crops as the length of the average man’s produc tive life. In spite of the inherent dif ficulty of this problem there is evi dence that interest in small forest holdings in this sector of our district is on the upswing. Increasing dollar value of forest land and of forest growths of all grades is the long term outlook. This should serve as strongly as any conceivable factor to interest many small land owners in the business potential of forest hold ings. The problem of adequate profit incentives for small-tract timber op erators is only partially solved. Many programs of assistance have been developed by government and indus try, and added emphasis on the prob lem seems inevitable. The outlook now appears more hopeful than ever. Problem : deforested a re a s Another major challenge is that large areas of our eastern forest land remain nonstocked or poorly pro ductive. The Lake States show very poorly among regions of the country in terms of acreage of nonstocked forest land. Minnesota alone has over 10 percent of the total nonstocked or poorly stocked commercial forest land in the United States, according to U. S. Forest Service statistics. Some authorities feel that a steppedup planting program is needed to overcome this situation. However, not all nonstocked land is suitable for planting. Since planting is expen sive, it is far preferable to let nature reseed whenever feasible. In Wisconsin a county-by-county forest inventory which has now been published for 12 of 16 forested Ninth district counties reveals some inter esting facts on plantable acreages. The total commercial forest land of these counties is 5.6 million acres of which nearly 2.3 million acres are understocked or nonstocked. Of the 2.3 million acres deficient in trees, about one third (845,000 acres) is restocking naturally and about one fifth (455,000 acres) is suitable for replanting. The remainder is un suitable for planting. Only about a fourth of the plantable acreage could be handled by machine planting methods. This particular challenge of bring ing about adequate stocking of large areas of the region’s forest land is felt to offer one of the best possi bilities for increasing wood supply. TABLE I— SELECTED FOREST STATISTICS FOR NINTH DISTRICT STATES FOREST AREA Total commercial forest percent in sawtimber percent in holdings of less than 100 acres S. Dakota Mich. Wis. Minn. (west) Mont. Thousands 18,849 16,325 18,098 1,266 15,727 14% of acres 52% 12% 36% H% 28% 39% 32% 23% 2% SAWTIMBER VOLUME AND GROWTH Total volume live sawtimber softwood hardwood Net annual growth 1952 softwood hardwood 55,770 55,075 695 247 229 18 3,167 3,167 61 61 12,538 5,039 7,499 788 328 460 16,1 11 3,847 12,264 895 187 708 21,141 5,469 15,672 1,010 287 723 Million board ft. GROWTH, CUT, MORTALITY ALL TIMBER Gross annual growth Mortality Net annual growth 1952 Annual total cut 1952 295 123 172 118 30 4 26 8.5 558 173 385 148 538 176 362 174 569 136 433 216 CAUSES OF MORTALITY By By By By fire insects diseases other causes* 1.6 % 61% 5% 32% 25% "75% 0 .6 % 8% 40% 51% 4% 31% 65% *Weather, animals, suppression, etc. Source: Timber Resources Review, U. S. Forest Service, Preliminary draft. 12 0.7% 10 % 32% 58% Million cu. ft. Significant g a in s possib le Among other problems we might briefly mention is the challenge of upgrading the general low quality of these eastern forests. Also, the still-dangerous destructive potential of forest insects and diseases deserves and is receiving a lot of attention. Through concerted efforts to solve these problems the volume of wood products yielded by the eastern for est land in our district could be doubled. Necessarily, a long period of adjustment would be required. However, an important point for us today is that we don’t have to think in terms of several decades to realize gains from our forests. Im proved management practices if un dertaken immediately on a wide scale could jump our annual timber growth by as much as one-fourth in very short order. Even more imme diate than this is the fact that a lot of wood growth—particularly hard woods—is going unused today. This surplus material offers an important potential for increased industrial use. Events of 1956 demonstrated that industry growth based on forest ma terials is still active in the Lake States section. Examples include the following: At L ’Anse in Upper Michigan, Celotex Corporation be gan construction of a $6.5 million mill to utilize an abundant north ern hardwood supply for the manu facture of fiber board and related products. The new plant will create several hundred jobs. In Minnesota, late in 1956, the Northwest Paper Company announced an expansion program at its paper mills in the northern part of the state. This par ticular program, costing about $5 million and resulting in 200 new jobs, will provide 150 tons a day of additional paper output. Other paper companies have also initiated or con tinued substantial expansion pro grams. We can summarize these thoughts neatly enough by recognizing that our eastern forests have much un tapped potential for timber produc tion, and if fairly treated they can, over a period of time, contribute in creasingly to the economic prosperity of this region. Now let’s turn west. SPRUCE STAND IN MONTANA 13 FORESTS OF THE WEST The western part of our district contains about half as much forest land as do the stretches in the east ern part bordering Lake Superior, and the forest scene is of sharply dif ferent complexion. Rainfall drops off as we go westward, from the 30 inch annual average in the Lake States forest areas to 15 inches or less on crossing the Dakotas and entering Montana. Beyond the plains, we reach scattered areas of higher eleva tion where loss by evaporation is less than in the plains and rainfall may be more. Our western forests occur in broad stretches from the Idaho border on the west through the Black Hills of South Dakota, typically at high alti tudes and in mountainous or hilly country. Most timber here is asso ciated with the Rocky Mountain sys tem, which supports substantial for ests of western softwood at eleva tions from 3,000 to 7,000 feet. Toward the east this forest is re stricted to the higher elevations, while west of the continental divide, in Montana, forests reach in to the valley floors. In acreage terms Mon tana has 15.7 million acres of com mercial forest land; in the Black Hills of South Dakota there are an other 1.3 million acres. Softwoods far outnumber the hard woods and are for practical purposes the sole commercial timber source. By species about half of Montana’s sawtimber is either larch or douglasfir, while ponderosa pine, lodgepole pine and spruce are also important. South Dakota’s commercial softwood timber is almost entirely ponderosa pine. Forests are typically densest and fastest growing toward the west —similarly the best sawtimber is lo cated there. Over two-thirds of the sawtimber in the western Ninth dis trict is located west of the continental divide in Montana, though but a small fraction of the gross land area CHART 2, TRENDS IN LUMBER OUTPUT jq Bi 11 i o n B o a r d F e e t 9 ----------------------------J! i;; .f.&jf lies west of the divide. Generalized location of commercial forest land in the western part of our district is mapped in chart i. S aw tim b er dom inates cutting In Montana and South Dakota sawtimber for lumber manufacture is by far the dominant use of the for est harvest. For example, timber pro duction in Montana during the years 1939-48 averaged as follows: Total timber output for sawlogs & sawbolts for fuelwood for pulpwood all other uses 90.0 million 6 1.4 million 16.1 million 1.2 million I 1.3 million cu. ft. cu. ft. cu. ft. cu. ft. cu. ft. The reason is that much more sawtimber is to be found in the west ern forests of our district. In fact, there are many overmature stands that hold virgin timber. Timber industries rank high in importance among manufacturing enterprises in the western part of the district. Employment in the lumber and wood products industries in Montana accounts for nearly onethird of total employment in manu facturing industries in the state, ac cording to the 1954 Census of Busi ness. In northwestern Montana the dominance of the industry is far greater even than this surprising fig ure. Capital expenditures by the lum ber and wood products industries in Montana during the year 1954 were two or three times as large as those in Minnesota. Lumber production in Montana (though it’s had its ups and downs) has shown a general historic trend upward as is illustrated in chart 2. Large-size sawmills have declined in number and output since 1921, while medium sized sawmills (1 million to 10 million board feet annually) have shown a great increase in relative and absolute importance. Close to 90 mills of this size operate today. The two largest Montana mills are those of the ]. Neils Company at Libby (recently purchased by St. Regis Paper Company) and of the Anaconda Company at Bonner. In the Black Hills there are two saw mills of 10 million feet annual ca pacity or larger, while the total ca pacity of all mills is about 70 million feet annually. Total sawmill capacity in the western part of our district is probably close to a billion board-feet annually. W estern forest h as its problem s, too One feature that the western for ests share with our eastern forests is that the actual growth of timber is far less than its ultimate potential. According to U. S. Forest Service estimates, the annual growth of saw timber in Montana averages only 38 board feet per acre in contrast to a po tential of 85 board feet per acre. This is largely the result of the fact that Montana has too much overstocked forest land (as well as a goodly share of sizes smaller than are tallied in the estimates). This situation ac counts for the fact that the forests of Montana are adding less cubic volume to sawtimber stands an nually than are the much smaller !5 acreages of softwoods in Minnesota. The major challenges to improving growth are distinctive and different from those of the east. Let’s consider them briefly. Problem : insects most destructive Perhaps the chief problem is to counter those destructive forces that are now claiming over one-fourth of the gross timber growth in this re gion. Fire, while more of a problem 16 than in the east because of the many lightning-caused mountain fires, has been fairly well brought under con trol. Forest service smoke jumpers, headquartered at Missoula, can be dropped in any remote area of the region within two hours after iden tification of a fire. Insects, in contrast, favored by re duced vitality of overmature trees, have been highly destructive agents. Two general types of insects supply ing the major threats are the budworm (which is susceptible to spray ing) and the bark beetle (which is not). Because the relative dryness of many of these forest stands in hibits spore-carried organisms, dis eases do not have the importance and destructive factor that they do in the Lake States. (As an example, there are vast stands of lodgepole pine, east of the Bitterroot valley in west ern Montana, killed by bark beetles in 1931-32, and still standing today, bleached and upright, though largely unaffected by decay.) The best insurance against exten sive loss from insect attack is an ade quate road system that enables im mediate salvage of infested or killed timber. One of the prime objectives of the Forest Service during the spruce bark beetle epidemic of 19503 in western Montana was just that— to construct roads enabling loggers to salvage as much of the 2 billion feet of killed spruce as possible. Considerable progress has been made in the direction of an adequate for est road system in recent years. Com prehensive spraying programs have been carried out, also, where they could prove effective. Then, too, there is the problem of bringing about a better age distribu tion . . . more stands in the most productive middle years. This can be done by planned cutting of ex tensive areas of old overmature for est and allowing them to be replaced over a period of time with vigorous young growth—preferably from the cost standpoint by natural seeding. As in the case of the Lake States, there are some areas that require re planting to insure their conversion to desirable forest land. Problem : ad ju stin g cutting to grow th Some species are overcut, particu larly in western Montana. These in clude the most valuable species of sawtimber in western Montana, white pine and ponderosa pine. If future supplies of these species are not to be endangered by too rapid depletion of the present growing stock the cutting schedule will have $12 MILLION ON ROADS TO UNDO ITS DIRTY WORK Windstorms caused heavy blowdowns of spruce stands in the northwestern Montana area in 1949-50. Great numbers of dead and fallen spruce trees became breeding grounds for the spruce bark beetle, and within four years, over 2 billion board-feet of spruce were killed by the insect's tunneling habits. The only really effective control measure is removal of the infested timber. Lack of roads proved a major obstacle. In a sense the epidemic had one beneficial effect: twelve million dollars worth of public and private spending for road con struction has provided needed avenues of access into some of the remote forest areas. Need for an adequate forest road system was emphasized by this costly bark beetle epidemic. !f! to be readjusted. The 1948 cut of ponderosa and white pine in Mon tana was 81 percent above the al lowable cut—the drain was particu larly heavy west of the continental divide. However, for most other species the amounts actually cut are far below the sustainable annual cut of material available. One of the big gest challenges lies in the use of much unused wood material. Par ticularly is this true for trees of poletimber size (5 inches to 11 inches in thickness at breast height). More extensive cuts of this material can and should be made now. Dead tim ber holds another large store of usable wood fibers. A cleanup prob lem of large proportions that stems from previous insect attacks is sal vage of dead timber. An estimated 1.2 billion board feet of salvageable dead sawtimber are to be found to day in the forests of Montana. In the abundant smaller sizes and littleused species and in the great quan tities of dead timber, as in the case of hardwoods in the eastern part of our district, there exists an imme diate possibility for expanded indus trial utilization. Industrial developments in this direction are clearly in evidence. A number of new sawmills introduced in the past few years are operating in areas previously untouched. These particularly interesting trends in the wood products industries will be the subject of an article to appear shortly in our Monthly Review. Problem : using w o od w a ste One final challenge to be men tioned here is the use of wood ma terials now wasted. About one-fourth of the sound timber cut in the U. S. is never used—half of this falls by the wayside in logging, the other half is sawmill waste. There are good opportunities for increased in dustrial output from these sources in Montana. Among highlights of the past year has been the announce ment of the beginning of an indus try new to Montana in the form of pulp and paper operations. An nouncements were made in 1956 of plans for construction of two pulpmaking operations: one at Missoula by Waldorf Paper Products Company and the other at Libby by the St. HARDWOOD FOREST, ST. C RO IX VALLEY, M INNESOTA-W ISCONSIN Regis Paper Company. An interest ing feature these two operations share is that each will utilize saw mill wastes from nearby sawmills almost exclusively, thus leaving the significant possibilities for pulpwood production directly from forest stands still untouched. It’s well documented, therefore, that Montana’s forest lands have considerable unexploited potential for industrial production. Further more, the yield from existing forest lands of the types of products used today can be greatly increased by improved management and protec tion of Montana’s forests. From a practical standpoint, perhaps an in crease of 50 to 60 percent in the vol ume of timber output can be accom plished with better balance of stands on forest lands in the western part of our district. The timber-based in dustries, already of great local impor tance, could contribute even more to the economy of this western region. SUMMARY AND CONCLUSIONS Forests, covering about one-fifth of the land area of the district, are clearly an important resource. A variety of industries is supported by them, such as lumber, millwork, pulp and paper and many wood spe cialties. The district is divided into two broad forest areas which have very sharp contrasts—in the west the ac tivity is focused on the production of sawtimber, in the east on pulpwood. The industries thus supported are significant ones, accounting for anywhere from one-third to threefourths of total manufacturing em ployment in the strictly forest area communities. Far from a has-been resource, the potential of our forests is most prom ising. We can point to plant expan sions announced during 1956 as evi dence of its vitality. Our forests can sustain an important segment of em ployment in contrast to many of our depletable resources which must eventually play out. The forest potential is both imme diate and long run. (1) There is immediate potential to expand industry in both forest re gions of our district—in the east through expanded use of hardwoods and in the west through the use of smaller size stock, little used species, great amounts of dead timber, and sawmill wastes. (2) There is long-run potential for greatly increased productivity where by we can as much as double the out put of some key wood materials. This is a problem of forest manage ment that will call for programs by the many owners of forest lands in the district working toward the same general goal—managing the forest resources to sponsor a sustained yield of timber. Specific measures include such things as improvement thin nings, planting, road building, pro tection and increased cuttings in sur plus areas—of which the district has a surprising number. And as we have pointed out, one of the keys to solving this problem lies in the hands of farmers and other small private holders of forest land. Forest authorities assure us that such an achievement is within our grasp. To return to the theme of our introduction, it would mean both a greater principal invested in the tim ber bank and a greater rate of re turn. The result would be better earnings than ever from our 50 mil lion acres of forest land—if we treat them wisely. END ACKNOWLEDGMENTS Most of the basic statistics used were drawn from the Timber Sources Review of the U . S. Forest Service. Additional information and com ments were received from the Forest Service s Northern and North Cen tral regions and from the Division of Forestry, State of Minnesota. Photo Credits: Pages 2, 6, 13, 14, 18,19 , courtesy of U. S. Forest Service Photos. Pages 5, 7, 9, 20, courtesy of Division of Forestry, State of Minne sota. 21 The district economy, 1956 In many respects, district economic developments resembled those of the nation in 1956. Thus, such wage rates as are periodically reported to government registered a new high both in the district and for the na tion. Employment, perhaps the most important single economic statistic, was also at a high in the district and nationally. And in 1956, prices for the district’s most important product, food, turned up. Previously, food prices had been falling while the cost of things we ‘import’ from the rest of the country edged up. AGRICULTURE District farmers enjoyed a slightly higher total of cash receipts in 1956 than was true in 19 5 5 . Preliminary income estimates indicate that cash receipts from marketing farm prod ucts may be up 3-4 percent in Min nesota and North Dakota. The same estimates show a slight drop in Mon tana receipts and a more substantial decline from a year ago in South Dakota, perhaps 10 percent. Both good and bad crop conditions were experienced in the district dur ing 1956—with weather and mois ture accounting for most of the dif ferences. Such differences took on a 22 distinctly regional pattern for the most part. Across the western Dakotas and eastern Montana, drouth and the threat of drouth was a major concern during the spring and the summer months. A siege of hot, searing winds about mid-June caught early seeded small grains, particularly oats, at a tender stage and cut yields over a wide area, including parts of southern Minnesota. The 1956 season was unusual in that late-seeded small grains on spring plowing seemed to suffer con siderably less damage than early seedings on fall plowing—contrary to the usual experience. Early-season dryness cut hay yields sharply in many western areas of the district, with the result that winter feed sup plies were reduced from normal. Even where early heat and dryness hurt hay and small grains, however, many of these same areas got enough moisture at just the right time to produce one of the best corn corps in several years. Further east, Minne sota produced a record corn crop, even with some 14 percent fewer acres planted to corn than in 1955 and despite some conversion of land to the Soil Bank. In fact, most of the eastern district, including much of North Dakota and some areas of eastern South Dakota, enjoyed ex cellent crops, while western areas of the district were reduced to well below normal. Despite area extremes, however, crop production for the district as a whole was relatively large, about 6 percent below 1955 output. Most of the reduction was in wheat, down 12 percent from 1955. Production of durum wheat was the exception. Good crop yields throughout much of North Dakota, helped by newlydeveloped rust resistant varieties (along with weather conditions fa vorable to rust free development) produced a durum crop of 39 million bushels, the largest in recent years. Although some cattle liquidation occurred in severely dry areas, cattle production continued large for the district as a whole. Numbers on feed were down about 9 percent from a year ago on October 1, but by the end of the year had increased more than seasonally to 5 percent more cattle on feed than a year ago. Hog production, on the other hand, was cut back even further in district states than the estimated national cutback of 8 percent. Reductions in 1956 spring pig farrowings in district states ranged from 17 to 26 percent, and farrowings for the year were down 16 to 23 percent. With reduced marketings, however, hogs enjoyed significant price improvement during the latter half of 1956. In fact, it can probably be said that the turning point in farm prices generally was reached about mid-1956. NONFARM ECONOMY A good measure of nonagricultural business in the district is the level of nonfarm employment. During 1956, employment rose in all district states; in the greater part of the dis trict a new postwar record was established. In Upper Michigan and CHART I— DISTRICT EMPLOYMENT COMPOSITION BY INDUSTRY Numbers in bars indicate percent of total M i ll io n E m p lo y e e s -ILLi 10.4 11 2 ■ 11,1 10-6' 10*5; 12.4 ----12.0 12.4s •12.5 « • ' t '12. T' 11 9 ' 12-° Servic* ] * 0 ^***** • 1II-.. ■1 ?,---- • j ^ a 4S# *5.9 ** 16.4 . >6.7 J 7-0 ' : '-.1s.7. i«-°. > ^ ;; <3<^ernrnf$f ^ « —■— ■j(_ .... --- *1; 21 -1 ' 20.1 '' 19.9^20-4 o'* 20.8 20.9 20.3 .6 J- * ''2 6 .9 M<^factyring '__ I;— ' — : ,— | — p 26.3^ 26.2 ' 25. 8 | 2 6 . S . 2 6 .6 V 26.2 * .4 * T rad e .2> 13 J , 1 3.4 13.3 ’ 3 .7 ,1 4 .1 A l l Othyarf 1950 1951 1952 1953 1 4 .K ' 1954 1 4 .1 ^ / , 1955 k " 1956 northwestern Wisconsin nonfarm employment rose from the relatively low level of 1955 but it did not equal the level which prevailed from the years 1950 to 19 5 5 . The volume of nonresidential con struction, which proved to be a main prop to the nation’s economy in 1956, set another record during the year. 23 The expansion in this type of con struction more than offset the con traction in home building. The amount of contracts awarded for all types of nonresidential construction — industrial, commercial, educa tional, public and heavy engineering —aggregated $542 million in this dis trict, an increase of $92 million from the 7955 figure. The district boom in nonresi dential construction was less marked than the national expansion. Indus trial plant expansion, in particular, was not as strong here in 1956 as in the more industrialized areas. The smaller bulge in construction activity is reflected in the relatively moderate employment rise in this field — 1956 employment being 3 percent above the average in 1955 for both residen tial and nonresidential projects. A strong district rise in manufac turing employment compensated for the moderate rise in construction. In this field the hiring of additional la bor exceeded the national rate. The increase in the average monthly total in 1956 was 4 percent; in the whole nation it was only 2 percent. Most of the additional district workers were engaged in the manufacture of dur able goods. In Minnesota, where nearly 90 per cent of the total district workers in the manufacture of durable goods are employed, the large increase in employment in 1956 was concentrated in the manufacture of electrical and nonelectrical machinery, excluding agricultural machinery. (In the lat ter industry, the average monthly 24 employment in 1956 was down al most 10 percent from 1955.) Smaller increases in employment occurred in lumber and wood products, fabri cated metal products, stone, clay and glass, and in primary metals. In the field of government service, which ranks third among the em ployment categories in the Ninth district, the 1956 increase averaged 3 percent, due largely to the hiring of additional teachers in schools and colleges, one result of the steadily growing school population. In the other enterprises—mining, transpor tation and utilities, trade, finance, insurance and service—the increases in employment ranged from a frac tion of 1 percent to a maximum of 2 percent. Not all industries enjoyed pros perity. One industry to face a declin ing market was residential building. The number of new housekeeping units authorized by permits in Ninth district cities was down 19 percent from the number authorized in 1955. During the autumn builders in the larger cities cut back sharply on their building and laid off some of their workers. The mining of iron ore was in terrupted by labor disputes in the steel industry and, later, in the Pitts burgh Steamship division of the United States Steel Corporation. These disputes drastically reduced shipments of ore to lower lake ports in July and August. Shipments in these two months totaled 10.7 mil lion gross tons as compared with over 12.5 million gross tons each in May and June. During this period employees lost substantial amounts of income so that it became necessary for many firms to adjust repayments on charge accounts and instalment loans. Before the end of the shipping season part of the lost income was recovered through overtime pay. In the 1956 season 77.6 million gross tons were shipped compared with 87.5 million in ’55 and 60.8 million in ’54. Slow farm-implement sales caused layoffs by manufacturers. Because of the strong demand for workers in industrial centers, some of these workers secured either temporary or permanent employment with other firms. This shortened the period of idleness and, thereby, reduced the loss of income for many laid-off workers and their families. The mild upturn in cash farm income has cre ated some confidence that the sales prospects for farm implements will be brighter this spring. The slump in automobile sales did not affect the economy of this dis trict as much as it did other regions of the nation. Only one assembly plant and a small number of parts manufacturers are located here. Ob viously, however, automobile deal ers and salesmen were affected by the drop in sales. In the four district states the decrease in sales, according to registrations, ranged from 9 per cent in Minnesota to 19 percent in South Dakota. Even the latter per centage is small compared with a 34 percent decrease in the state of Michi gan. Nationally, passenger car sales dropped from 7.2 million in 1955 to an estimated 6.0 million in 1956, a decrease of 16 percent. Ninth district member banks Their annual financial statements disclose that our member banks en joyed a prosperous 1956. Deposits, net current earnings and loans regis tered new all-time highs. Interest rates, of course, were also rising. Bank expense rose too. Salaries and interest 011 time deposits were re sponsible for almost 70 percent of the $10 million addition to Ninth district member bank operating expense in ! 956Bank income accounts last year primarily reflected a substantial de mand for loans of all types. Thus $14 million of the $18 million additional revenue at district member banks in 1956 represented increased reve nue from loans. Loans increased at member banks in every district state or part state. Gains ranged from 2.4 percent at member banks in South Dakota to 13.5 percent at our member banks in Michigan. During the year 1956 loans and investments averaged 25 $1,823 million and $1,692 million re spectively at all district member banks. In the previous year loans and investments averaged $1,621 million and $1,856 million respectively. Thus, in 1956, for the first time in many years, the value of loans ex ceeded the value of investment se curities at our member banks. This notable occasion is marked on chart 2 by the intersection of the lines repre senting loans and investments. In every year for the past decade loans at our member banks have grown. Every major category of bank loans has shared the growth. Loans secured by real estate scored the largest gain in the postwar decade— up $436 million. Business-type loans, officially labeled ‘commercial and in dustrial,’ rose $362 million in the same period. Consumer loans and production-type loans to farmers were up by $336 million and $113 million respectively in the 10-year period. The impressive expansion of real estate credit was, of course, fostered by government insurance and guar antees of home mortgages. At the end of 1956 over half the real estate loans on the books of district mem ber banks were insured or guaran teed. Loans with this feature are not strictly comparable to other types of bank loans owing to the reduced risk entailed. The lower risk factor in turn has induced banks to acquire government-underwritten mortgage loans in spite of the fact that they yield less than most other kinds of bank loans. Chart 3 indicates that loans se cured by real estate rose less rapidly in 1956 than they did in previous years. This reduction of the growth rate reflected the fact that yields on other loans and investments were CHART 2— DEPOSITS, LOANS AND INVESTMENTS OF DISTRICT MEMBER BANKS Mi l l i on dollars 26 CHART 3—TYPES OF LOANS AT DISTRICT MEMBER BANKS MILLION 1947 DOLLARS 1948 1949 1950 1951 rising while yields on insured and guaranteed mortgages remained un changed at the fixed legal maximum. Hence, lenders found such mort gages becoming less attractive rela tive to other uses for funds. While the increase in all kinds of mortgages held was $74 million in 1955 it was down to $46 million in 1956. Furthermore, while $41 million of insured or guaranteed mortgages were added in 1955, only f n million of such mortgages were added in 1956. These figures indicate that mortgage loans without a fixed yield were added more rapidly in 1956 than in 1955 while loans of fixed yield were added less rapidly. The rate of increase in commercial and industrial loans was also reduced in 1956. These loans rose $116 mil lion in 1955 and $55 million in 1956. Since the proceeds of commercial 1 952 1953 1954 1 955 1956 and industrial loans, are often used to finance the purchase of inven tories, it may be that the loan figures reflected a lowered rate of inventory accumulation in 1956, particularly since other data also suggest a low ered rate of inventory accumulation in 1956. Production loans to farmers, which increased $23 million in 1955, were unchanged in 1956. Loans secured by farm real estate are included in the real estate loan total mentioned pre viously. Farm real estate loans went up $2 million in 1955 and $1.5 mil lion in 1956. Loans to farmers guaranteed by the Commodity Credit Corporation are not included in either the farm real estate or farm production loans mentioned above. These loans fell $32 million in 1955 and $15 million in 1956. The only major category of loans which registered a larger gain in 1956 than in 1955 was the consumer type. Although the auto component of consumer loans displayed a lesser growth rate in 1956 the increase of other retail instalment paper was greater in 1956 than in 1955. The postwar loan expansion at dis trict banks (and at banks in the rest of the country) has been financed in large part by the liquidation of se curities, particularly Treasury obli gations. The removal of government securities from bank portfolios has narrowed the range of alternatives available to banks in need of cash. Thus, the importance of borrowing by banks has been growing. In none of the years since the early 1930’s have borrowings of member banks from this bank, for example, been as large as in 1955 or 1956. Not- since 1932 have loans repre sented such a large proportion of dis trict member bank deposits as at the end of 1956. The ratio of loans to deposits is one popular indicator of bank liquidity. This ratio has risen in every one of the postwar years as shown by chart 4. Principally in response to the sub stitution of loans for investment se curities, the gross receipts of our member banks have climbed in every one of the postwar years. The average yield on loans held by the member banks is well over twice the yield earned on investments. Another factor operating to lift gross receipts has been a rising level of interest rates in general. Reflecting this is the fact that receipts from loans were up 17 percent last year while average loans held were up only 12.5 percent. And income from securities was up slightly—despite a reduction from the previous year in the average amount held. CHART A— RATIO OF LOANS TO DEPOSITS, NINTH DISTRICT MEMBER BANKS Percent 28 EARNINGS & DIVIDENDS OF DISTRICT MEMBER BANKS (millions of dollars) 1955 $ 83.8 39.6 24.9 148.3 1956 $ 97.8 40.7 27.5 166.0 Change $+14.0 + l.l + 2.6 + 17.7 Salaries Interest on time deposits Other current expense TOTAL Current Expense 44.9 15.1 33.0 93.0 48.9 17.8 36.9 103.6 + 4.0 + 2.7 + 3.9 + 10.6 Net current earnings Deduct net of other charges and credits Net profits before income tax Income tax 55.3 7.3 48.0 20.0 62.4 18.2 44.2 18.0 + 7.1 + 10.9 — 3.8 — 2.0 28.0 26.2 — 1.8 Loan income Investment income Other income TOTAL Current Earnings Profits after taxes The table shows that while income from loans, securities, and other sources rose in 1956, the principal components of expense also rose. Thus, for example, salaries were up $4 million and interest on time de posits was up $2.7 million in 1956. But total current expense increased by $7.1 million less than did total current earnings with the result that net current earnings rose by this amount. However, in financing the loan ex pansion which produced most of the addition to loan revenues, the banks liquidated securities, sometimes at a loss. Such losses jumped from $5.4 million in 1955 to $12.1 million in 1956. Owing to deductions from net current earnings for these and other charges, the net profits of district member banks fell by $3.8 million in 1956; but income taxes fell by $2 million with the result that profits after taxes declined but $1.8 million. It is perhaps worthy of note that the higher level of interest rates gen erally in 1956 was associated with a depressed bond market which in turn gave rise to losses by banks on the sale of securities; also, expenses of the member banks were enlarged by reason of an increase in the aver age rate of interest paid on time de posits. In other words, rising inter est rates have added to expense as well as to revenue at the banks. The behavior of member bank de posits serves to confirm the other evidence of favorable economic con ditions in the district during 1956. In 1955, while deposits at member banks in the rest of the nation rose somewhat, district banks reported a slight loss of deposits. But in 1956, preliminary figures disclose that dis trict member banks enjoyed a some what larger percentage deposit growth than member banks in the rest of the nation. The respective fig ures were + 2 .9 percent and + 1.8 percent (preliminary estimates). 29 CHART 5— REVENUE FROM LOANS AND INVESTMENTS AND TOTAL CURRENT EXPENSE M IL L IO N DOLLARS 1 1946 ) 1947 1 1948 I_____ I_____ I_____ I_____ I_____ I_____ 1 1949 1950 Demand deposits and time deposits accounted for $76 million and $45 million respectively of the $121 mil lion total district increase. The time deposit gain of $45 million compares with an increase of only $32 million in 1955. Doubtless the improvement of prices for commodities produced on district farms aided deposits at coun try banks in the district. These banks enjoyed a 3.5 percent deposit increase during 1956 while city member banks in the Ninth district reported a 2.3 percent gain. Only at member banks in South Dakota did deposits fail to register an increase for the year. Farm incomewise, that state fared least well of any in the district last year largely 30 1 951 1952 1953 1954 1955 1956 because of drouth conditions. At member banks in other district states, 1956 deposit growth ranged from a little more than 3 percent in Minne sota to more than 4.5 percent in North Dakota. CHART 6— MEMBER BANK DEPOSITS 1956 Percentage change Federal Reserve Bank of M inneapolis During 1956, as the building pro gram neared completion, additional space became available for use by de partments previously lodged in other buildings. By the end of the year, for the first time since 1950, all the bank’s operations were conducted under one roof. The roof, inci dentally, had risen eight stories since the construction program began in I 955OPERATIONS In spite of the many inconven iences which resulted from the build ing program, service to the member banks, the government and the pub lic was undiminished in quality or quantity. Some departments of the bank accomplished a larger volume of work than ever before. For example, the Chec\ Collection department of the head office and the Helena branch functioned 6.5 percent more items in 1956 than in 1955. This department, which em ployes more workers than any other, handles postal money orders and savings stamp albums as well as gov ernment and other checks. The num ber of items handled has increased in each of the postwar years and in 1956, at 123.580 million, was more CHART 7—VOLUME OF OPERATIONS, MINNEAPOLIS FEDERAL RESERVE BANK AND HELENA BRANCH Mi llions of pi eces 0L I 1946 I 1947 I 1948 I 1949 I 1950 I 1951 I 1952 I 1953 I 1954 I 1955 J 1956 than double what it had been as re cently as 1948. Another department which experi enced larger volume in 1956 than in *955 was Currency and Coin. More than 70 million pieces of currency and more than 148 million coins were counted by the department in 1956, up 5 percent and 8 percent re spectively from the year before. The dollar value of currency shipments to and from member banks was up 10 percent and 15 percent respectively. The bank’s Fiscal Agency depart ment is principally concerned with the issue, redemption and exchange of U. S. Treasury securities. In 1956 the department accomplished 4,469 thousand such transactions, up 3 percent from 1955. Other tasks performed by ‘Fiscal’ for the government included the payment of coupons detached from Treasury securities, the bookkeeping in connection with Treasury deposits at the commercial banks, and the destruction of Treasury currency when it became unfit for use. As a special service, Fiscal Agency buys and sells government securities on the open market for the account of banks in the district. Such trans actions numbered 2,145 m x95^One of the few departments of the bank to experience a slackened pace in 1956 was the Non Cash Collections department. A decline of almost 16 percent was recorded in the number of items handled. This resulted from the adoption of new arrangements for processing certain grain drafts. The bank’s Safekeeping depart 32 ment had custody of securities worth $M77 billion at the end of 1956. This amount has been falling in re sponse to the liquidation of securities by district banks to finance loan ex pansion. Despite the reduction in the dollar value of securities held, the number of securities held and the number of coupons clipped have in creased. The 357,000 coupons clipped in 1956 represented an increase of 9 percent over 1955. A tremendous volume of funds is shifted from one part of the nation to another every day by means of the Federal Reserve Wire Transfer Sys tem. Transactions in the market for ‘federal funds’—where one commer cial bank borrows from another— are ordinarily effected by wire trans fers. At almost 66 thousand, the number of wire transfers handled by the bank in 1956 was up 6.5 percent from the year before. FINANCIAL STATEMENTS The number of loans made by this bank reached a postwar high in 1956, up 11 percent from 1955. Despite this, the average daily amount of loans at the Federal Reserve Bank of Minneapolis in 1956 was lower by 17 percent than in 1955. In the first half of 1956 Federal Reserve loans averaged substantially more than a year earlier while in the last half loans averaged substantially less than a year earlier. The reduction in the average daily volume of loans in 1956 was not re flected by a reduction in the bank’s CHART 8— MEMBER BANK BORROWING Average daily volume M illio n d o llars 4 5 ------------------ '47 '48 '49 '50 '51 '52 '53 '54 '55 '56 earnings on loans. Such earnings (see Statement of Earnings and Ex pense) rose by 20 percent. This was produced by an increase in the dis count rate from 2V2 percent to 3 per cent on April 13. Earnings on securities held for the bank (in the Federal Open Market portfolio) also increased in 1956 de spite a reduction in the daily average amount held. The 35 percent addition to revenue from securities held entire ly reflected increased yields on securi ties acquired to replace those sold or matured. Since mid-1954, yields on government securities have been in an upward trend. Expenses of the bank rose $838 thousand in 1956. With revenues higher by $3,587 thousand, net cur rent earnings were up by $2,759 thousand. After allowance for cer tain other charges and credits, net earnings available for payment to the Treasury and stockholders and for transfer to surplus were up $2,682 thousand from 1955. Since the dividend rate on Fed eral Reserve stock is fixed by law at 6 percent, the 5.7 percent increase in dividends paid during 1956 resulted entirely from the issue of additional shares. As member banks enlarge their capital and surplus they are re quired to enlarge their holdings of Reserve bank stock in the same pro portion. Earnings after the payment of dividends in 1956 amounted to $9,340,498. Of this amount, 90 per cent was paid to the U. S. Treasury as interest on Federal Reserve Notes and 10 percent was added to the surplus of the bank. CHART 9— LOANS GRANTED TO MEMBER BANKS By the Minneapolis Federal Reserve Bank Number of loans 1400------------------------------------------------------------- ■46 '47 '48 '49 '50 '51 '52 *53 '54 '55 '56 33 EARNINGS AND EXPENSES Earnings from: 1956 ........................................................................... ...... Discounted Bills $ 1955 1,010,077 $ United States Government Securities...................................... ............... ][3,086,844 Industrial Advances .................................................................... All Other ......................................................................................... 840,861 9,669,412 2,591 3,997 13.764 12,007 Total Current Earnings...................................................... ---- $ 14 ,113 ,2 7 6 $10 ,526 ,277 .................................................................... . . . . $ 4,174,681 $ 3,337,558 132,600 105,000 ........................................................................... 29,371 65,895 Cost of Redemption.................................................................. 9,933 10,309 ...................................................................... . . . .$ 4,346,585 $ 3,518,762 $ 9,766,691 $ 7,007,515 Expenses: Operating Expenses Assessment for Expenses of Board of Governors................ Federal Reserve Currency: Original Cost Net Expenses Current Net Earnings........................................................................... Additions to Current Net Earnings: Profit on Sales of U. S. Government Securities (net) All Other ......................................................................................... Total Additions .................................................................... . . . . $ 7,371 — 38 377 86,520 7,748 $ 86,482 $ h ,536 Deductions from Current Net Earnings: Reserve for Contingencies........................................................... 11,4 58 All Other ......................................................................................... 438 2,022 ............................................................... 11,896 $ 13,558 Net Addition to Current Net Earnings........................................... 4,148 $ 72,924 Total Deductions Net Earnings before payments to U. S. Treasury......................... . . . .$ 9,762,543 $ 7,080,439 8,406,449 6,013,073 ....................................................................................... 422,045 399,257 Transferred to Surplus (Section 7 ) .................................................... 934,049 668,109 Surplus Account ( Section 7) Balance at Close of Previous Y e a r.................................................... . . . .$17 ,58 6 ,155 $16,918,046 Paid to U. S. Treasury (Interest on F. R. N otes)......................... Dividends Paid Transferred from Profits of Y e a r......................................................... 934,049 Balance at Close of Y e a r.............................................................$18,520,204 34 668,109 $17 ,58 6 ,15 5 S T A T E M E N T O F C O N D IT IO N ASSETS Dec. 3 1 , 1955 Dec. 3 1 , 1956 Gold Certificates ..................................................................................$ 351,392,666 $ 339»278,776 Redemption Fund for F. R. Notes.................................................. 22,952,138 23,728,983 Total Gold Certificate Reserves.........................................................$ 374,344,804 $ 363,007,759 9,319,030 $ 7,907,872 Other Cash ...........................................................................................$ .................................................................................. 3,530,000 1,355,000 Foreign Loans on G o ld ...................................................................... 625,000 25,000 42 ,35° 59,630 Bills Discounted Industrial Advances ........................................................................... U. S. Government Securities: ............................................................................................. 63,283,000 67.895.000 N o t e s ............................................................................................... 206,759,000 343.283.000 Certificates of Indebtedness....................................................... Bonds Bills 246,937,000 143.476.000 ............................................................................................... 38,879,000 36.414.000 Total U. S. Government Securities..............................$ 555,858,000 $ 591,068,000 Total Loans and Securities..............................................$ 560,055,350 $ 592,507,630 Due from Foreign Banks.................................................................... 556 557 F. R. Notes of Other F. R. Banks.................................................... 14,376,750 9,587,500 146,350,942 14 3,6 6 2 ,7 11 Other Assets ........................................................................................ Total Assets .........................................................................$1,104 ,447,432 $1,116 ,6 7 4 ,0 2 9 LIA BILITIES Federal Reserve Notes in Actual Circulation................................ $ 498,235,535 $ 531,709,075 3 9 8 ,117 ,19 0 $ Deposits: Member Bank— Reserve Accounts........................................... $ 405,586,297 U. S. Treasurer— General Account......................................... 22,651,606 25,107,737 Foreign ........................................................................................... 7,400,000 9,650,000 Other Deposits 3*835,681 5,693,589 ........................................................................... Total Deposits .................................................................... $ Deferred Availability Items................................................................$ 432,004,477 $ 446,037,623 142,597,491 $ 108,767,705 594,681 4 11,3 4 0 Total Liabilities .................................................................. $ 1,0 7 3 ,4 3 2 ,1 84 $1,086,925,743 Other Liabilities .................................................................................. CA PITA L ACCOUNTS Capital Paid I n ...................................................................................... $ 7 ,18 2,100 $ 6,860,650 23,833,148 22,887,636 Total Liabilities, Capital Accounts................................ $1,104 ,447,432 $1,116 ,6 7 4 ,0 2 9 Other Capital Accounts...................................................................... 35 One weakness of balance sheets is that they are dated, and thus, if some of the balances fluctuate widely from day to day, a particular balance sheet may not accurately represent the nor mal condition of a business. And so it is with the year-end statement of this Federal Reserve Bank. Member bank borrowings, for example, averaged $35.4 million in 1956—down 17 percent from the 1955 average; yet, the year-end state ment shows member bank borrow ings of $3.5 million, up from the $1.4 million figure shown at the end of 1955. At the end of 1956, district mem ber bank reserve balances were down more than $7 million from the end of 1955; yet, during the whole month of December 1956, district member bank reserve balances aver aged more than $8.5 million higher than the average a year earlier. Fur thermore, average reserves minus average borrowings were $434 mil lion in December 1956, up $25 mil lion from the year-earlier period. The bank’s gold certificate re serves were aided in 1956 by the in flow of deposits to the Ninth district. This is because when a check drawn on a member bank outside the dis trict is deposited with us, gold cer tificates are transferred from the Fed eral Reserve bank serving the drawee bank to this Federal Reserve bank. Our note circulation declined again in 1956. The currency needs of this district are now satisfied in part with notes issued by other Reserve banks; hence, the amount of our notes out 36 standing does not reflect the currency circulation in the district. The bank’s capital funds were augmented, as noted previously, by the sale of new stock and by the transfer to surplus of earnings which remained after the payment of divi dends and of interest on Federal Reserve notes to the Treasury. MANAGEMENT In 1956 for the first time in many years there were no changes in the personnel of the Boards of Directors of either the Federal Reserve Bank of Minneapolis or its Helena Branch. At the head office Mr. Leslie N. Perrin, member of the Board of Di rectors and former President of Gen eral Mills, Incorporated, was reap pointed Class C director by the Board of Governors of the Federal Reserve System for a three-year term beginning January 1, 1957. He was also redesignated Chairman of the Board and Federal Reserve Agent for 1957. Dr. Oscar B. Jesness, Head of the Department of Agricultural Economics at the University of Min nesota, was redesignated Deputy Chairman for the coming year. Mr. Harold N. Thomson, Class A director, and Mr. J. E. Corette, Class B director, were both re-elected by the member banks of the district for additional three-year terms begin ning January 1, 1957. At the Helena Branch, Dr. Carl McFarland, President of the Montana State University at Missoula, Mon tana, Mr. George N. Lund, Chairman of the Board and President of the First National Bank of Reserve, Montana, and Mr. J. Willard John son, Financial Vice President and Treasurer of the Western Life Insur ance Company of Helena, Montana, were all reappointed to two-year terms on the Branch Board, begin ning January i, 1957. Dr. McFar land’s appointment was made by the Board of Governors while Mr. Lund and Mr. Johnson were reappointed by the bank’s directors. Mr. Julian B. Baird, Chairman, First National Bank of St. Paul, was renamed by our Board to an addition al one-year term as member of the Federal Advisory Council. There were changes in the official staff of the bank. Retiring from the bank on April 1, 1956 was Mr. Otis R. Preston, Vice President in charge of the Public Services department, who had been on the bank’s staff for nearly 36 years. Two other officers announced their retirement from ac tive service to become effective Feb ruary 1, 1957; these were Mr. Earl B. Larson, Vice President and Cashier, and Mr. George M. Rockwell, Assist ant Cashier. Mr. Larson had been the officer in charge of the Fiscal Agency department for many years and Mr. Rockwell had been associated with the bank discount and credit func tions. Advanced from Assistant Vice President to Vice President were Mr. Melvin B. Holmgren, officer in charge of the Fiscal Agency department, and Mr. Arthur W. Johnson, officer in charge of the Check Collections department. Mr. Clarence W. Groth, Vice President, was made Vice President and Cash ier. These promotions were all ef fective January 1, 1957. On March 1, 1956 Mr. Oliver S. Powell and Mr. Albert W. Mills were reappointed to five-year terms as President and First Vice President of the bank respec tively. PUBLIC RELATIONS The bank’s programs of bank re lations and public information and education were somewhat curtailed during the year because of our build ing expansion program. The annual series of Short Courses in Central Banking, which have been conducted each year since 1948, was temporarily discontinued and will not be resumed until early in 1958. Tours of the bank and special luncheons were also re duced in number because of the building program. The remainder of our Public Serv ices activities was continued in much the same form as in 1955. The annual Assembly program for member bank officers and directors was held in April and attended by 517 guests. The eighth annual Workshop meet ing in May drew a record 122 college teachers of money and banking and economics, and November marked the 13th annual Examiners Confer ence for representatives of all federal and state supervisory agencies in the district. Representatives from the bank and the Helena Branch called on each of the nearly 1,300 banks in the dis continued on page 40 37 DIRECTORS OF THE FEDERAL RESERVE BANK OF MINNEAPOLIS AND HELENA BRANCH DIRECTORS Class A Term Expires December 31 C . R e f l i n g , Cashier, First National Bank in Bottineau, Bottineau, North Dakota 1957 F. R i n g l a n d , President, Northwestern National Bank of Minneapolis, Minneapolis, Minnesota 1958 N. T h o m s o n , Vice-President, Farmers & Merchants Bank, Presho, South Dakota 1959 H aro ld Jo seph H aro ld Class B R ay C. L a n g e , President, Chippewa Canning Company, Inc. Chippewa Falls, Wisconsin 1957 T . President, Super Valu Stores, Inc. Hopkins, Minnesota 1958 President and General Manager, Montana Power Company, Butte, Montana 1959 J. G . E. H a r r is o n , C o rette, Class C O. B. J e s n e s s ,2 Head, Department of Agricultural Economics, University of Minnesota Institute of Agriculture, St. Paul, Minnesota 1957 President and General Manager, Lake Shore, Inc., Iron Mountain, Michigan 1958 N. P e r r i n ,1 Director, General Mills, Inc., Minneapolis, Minnesota 1959 F. A lb ee F l o d in , L e s lie HELENA BRANCH Appointed by Federal Reserve Bank A. W. H e i d e l , President, Powder River County Bank, Broadus, Montana J. G eo . 1957 Financial Vice-President and Treasurer, Western Life Insurance Company, Helena, Montana 1958 N. L u n d , Chairman of the Board and President, The First National Bank of Reserve, Reserve, Montana 1958 W il l a r d J o h n so n , Appointed by Board of Governors G eo rge C a rl R. M i l b u r n ,3 Manager, N Bar Ranch, Grass Range, Montana President, Montana State University, Missoula, Montana 1957 M c F a r l a n d ,1 1 Chairman 2 Deputy Chairman 3 Vice-Chairman 38 1958 OFFICERS OF THE FEDERAL RESERVE BANK OF MINNEAPOLIS AND HELENA BRANCH OFFICERS S. O liv e r A lb e rt P o w e ll, W . M ills , Banking Department F re d fr.ck Jo h n J. J. W. A rth u r E a rl W. B. M il f o r d E. O rth en W . C h r is t ia n M O. Sa th e r, H . /• H o lm g re n , C. n -j * Assistant Cashier B ro nner, U elan d , Vice-President, Counsel and Secretary Research Department Assistant Cashter N ic e , B. T Vice-President Legal Department Assistant Cashier S t r o t h m a n , J r ., V an TT n W il l ia m S ig u r d R o ck w ell, M a u r ic e Vice-President Chief Examiner .. Assistant Vice-President M. C lem en t M c C o n n e ll, G ro bel, Assistant Vice-President G eo rg e arcus G . K. , , M e lv in Operating Research Officer O h n stad , R ie s , Department Fiscal Agency— Government Securities Vice-President L ysen , R o ger General Auditor M cN u l t y , E x a m in a tio n H a r o ld Vice-President & Cashier Vice-President Jo h n s o n , L arso n , g ank Assistant Cashier G roth , J. A rth ur Personnel Officer Cram er, G ille tte , C laren ce Audit Department Assistant Cashier C a r l E . B e r g q u is t , President First Vice-President Vice-President Assistant Vice-President F r a n k l in O sca r F. L. P a r so n s, L it t e r e r , Director of Research Business Economist Helena Branch K . F o s s u m , Vice-President assigned to Helena Branch A . B e r g l u n d , Assistant Vice-President assigned to Helena Branch K y le H a r o ld L. H e a t h , Assistant Cashier assigned to Helena Branch Jo h n MEMBER OF FEDERAL ADVISORY COUNCIL B. B a i r d , Chairman, The First National Bank o£ Saint Paul, St. Paul, Minnesota Ju lia n INDUSTRIAL ADVISORY COMMITTEE S h e ld o n Jo h n A. H . A. B. M. W ood, M. Minneapolis, Minnesota, Chairman Ishpeming, Michigan D a g g e tt, H e ia n , W a lte r V. B u sh , St. Paul, Minnesota Chippewa Falls, Wisconsin R in g e r , S r ., Minneapolis, Minnesota 39 trict at least once during the year. Some of the larger banks received more than one call. We also con tinued our program of sending men from our staff to member banks for commercial bank training during the year. Federal Reserve Bank speakers appeared before approximately 13,400 persons during the year; our movie was shown to a reported 20,300 addi tional persons; and 15,300 additional copies of our picture book were dis tributed. Other movies and publica tions were also in good demand and our two currency displays were in frequent use at bank open houses and anniversary celebrations through out the district. Two new national banks opened in the district during 1956 and two existing national banks closed. One state bank became a Federal Reserve member during the year and one state bank withdrew from member ship. One state member bank con verted to a national bank. The net result for the year was that the total number of member banks in the dis trict remained unchanged at 473. The total number of banks in the district also remained unchanged at 1,296. EN D